Can a bankrupt seller’s trustee cancel a contract I’m relying on before I close?

The mechanic and its clock

Section 65.11(1) lets a debtor “disclaim or resiliate any agreement to which the debtor is a party”, on notice to the trustee and the other parties — but “the debtor may not give notice unless the trustee approves the proposed disclaimer or resiliation”. Under s.65.11(3), a party to the agreement then has fifteen days to apply to court for an order that it not be disclaimed; if nobody does, s.65.11(6) disclaims it thirty days after notice. CCAA s.32 runs the identical power in a CCAA proceeding, with the monitor approving in place of the trustee.

Why a buyer has no lever

Read who the rights are given to. The right to apply against a disclaimer, the right to demand written reasons, and the right under s.65.11(8) to a provable claim for “a party to the agreement who suffers a loss in relation to the disclaimer” — every one is drawn as belonging to a party to the agreement. A prospective buyer under a letter of intent is a party to its own LOI and to nothing else; it has no application to make and, if the disclaimed contract was the reason the deal was priced where it was, no provable claim for the value it lost. The trustee’s own incentive cuts the same way — the trustee’s duty runs to creditors, and a disclaimer that sheds a cure obligation and improves creditor recovery is exactly the kind of disclaimer a trustee should approve, even where it destroys a buyer’s model.

What is off the table entirely

The power is not unlimited. Section 65.11(10) excludes an eligible financial contract, a lease covered by s.65.2(1), a collective agreement, a financing agreement where the debtor is the borrower, and a lease of real property where the debtor is the landlord. Outside those categories, the practical protection for a buyer is not statutory — it is a letter of intent that treats a key contract as a condition to be confirmed with the actual counterparty, not as an asset the seller is assumed to be able to keep.

Case Files

The agreement the seller disclaimed before closing is this exact mechanic: an exclusive distribution agreement worth 61% of gross margin, disclaimed with the trustee’s approval before closing, with the buyer holding no standing under s.65.11(3) and no provable claim under s.65.11(8). For the mirror problem — a supplier trying to cancel a contract because of the filing, rather than the debtor disclaiming one — see the next question.

Sources

• • Bankruptcy and Insolvency Act, s.65.11 — marginal note Disclaimer or resiliation of agreements: (1) the power and trustee-approval precondition; (3) the 15-day right of a party to apply; (6) the 30-day effective date; (8) provable claim for loss; (10) the exceptions.
• • Companies’ Creditors Arrangement Act, s.32 — the equivalent power with the monitor approving.
• • Treadstone Law — customer contract consents on an asset purchase — how contract value is secured in a solvent deal; it does not address disclaimer, which has no solvent-deal equivalent.